Ülo Ennuste Economics

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Letter to the Editor of the FT


Slips of the pen or logic?

  Sir, John Dizard (“Estonia’s recovery holds little hope for euro zone”, January 30 2011) contains many erroneous and questionable statements, e.g.:


“Not only had economic growth resumed, after a net decline of 14 per cent of GDP in the previous year, but the country was on a clear path to euro area entry.”

 –  good heavens, 14 per cent  has been in 2009, and as in 2008 has been decline 4 per percent , we may roughly say that  the cumulative net decline from the pre-crises peak was 18% whatever this “net” is supposed to mean.

“Estonia’s economy grew at an estimated 2.4 per cent in the past year, and after a 4.2 per cent rise this year, is expected to reach its pre-crisis peak GDP in nominal euro terms by 2012.”

– how come, that in real terms 2,4+4,2+4(?) equals 18, or is Mr Dizard really trying to compare non-comparable phenomena: that is partially in the real terms and growth in nominal terms – cumulative inflation included (by the  way, this type of fuzzy economic-mathematics feels familiar from our current post-crisis election campaign).   

  “The private sector’s previously excessive debt levels were reduced.”

 – these were reduced indeed but considering the relatively low-level of the NNI p.c. and starting after-crisis out-flow of domestic capital, these are still highly excessive.

“So does the Estonian case give hope for a similar rapid recovery in Greece, Ireland, Spain, Portugal, and other “adjusting” euro members? I wouldn’t bet on it. In part, it depends on how necessary it is for those countries to have as favorable “initial conditions” as Estonia. Whatever my differences with Mr Krugman over Estonia’s policies, he has been right about the general dangers of “debt overhang”, or the “debt trap”, for internal devaluers.”

– good heavens – “to have as favorable “initial conditions” as Estonia” – has it evaded from Mr Dizard’s considerations that Estonian employment is still significantly smelting from “internal devalues” plus excessive budget cuts, that growing poverty risks have driven many active persons out of the country and by that reducing the GDP potential, that the county has heterogeneous ethnicity problems. And, perhaps Krugman has taken these dismal “initial conciliations” also into equation, saying – I don’t now should I congratulate or feel sorry.

All-in-all, Estonian economy and economics have got losses in this 2007-9 conflagration against “invisible hand” and to struggle out and have recovery may take many years, and better take a non-myopic Krugmanian view on that.  And last but not least, we should not forget that the crisis has demonstrated that the tax system in operation is not balanced sufficiently and the present quality of the public socio-economic knowledge structure is not at the level to reform it optimally.

Nõmme, Tallinn, Estonia


January 31, 2011 - Posted by | Uncategorized

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